Goldman Sachs Trust (the Trust ) Goldman Sachs Asset Allocation Portfolios Class A, B, C, Service and Institutional Shares of Goldman Sachs Balanced Strategy Portfolio Goldman Sachs Growth and Income Strategy Portfolio Goldman Sachs Growth Strategy Portfolio Goldman Sachs Equity Growth Strategy Portfolio Supplement dated September 8, 2006 to the Prospectuses dated April 28, 2006 Goldman Sachs Specialty Funds Class A, B, C, Service and Institutional Shares of Goldman Sachs U.S. Equity Dividend and Premium Fund Goldman Sachs Tollkeeper Fund SM Goldman Sachs Structured Tax-Managed Equity Fund Goldman Sachs Real Estate Securities Fund Supplement dated September 8, 2006 to the Prospectuses dated April 28, 2006 Goldman Sachs Structured U.S. Equity Flex Fund Class A, C and Institutional Shares Supplement dated September 8, 2006 to the Prospectuses dated June 14, 2006 Goldman Sachs Domestic Equity Funds Class A, B, C, Service and Institutional Shares of Goldman Sachs Balanced Fund Goldman Sachs Research Select Fund SM Goldman Sachs Capital Growth Fund Goldman Sachs Growth and Income Fund Goldman Sachs Large Cap Value Fund Goldman Sachs Strategic Growth Fund Goldman Sachs Concentrated Growth Fund Goldman Sachs Mid Cap Value Fund Goldman Sachs Growth Opportunities Fund Goldman Sachs Small/Mid Cap Growth Fund Goldman Sachs Small Cap Value Fund Supplement dated September 8, 2006 to the Prospectuses dated December 29, 2005 Effective November 10, 2006, the Goldman Sachs High Yield and High Yield Municipal Funds will charge a 2% redemption fee on the redemption of shares (including by exchange) held for 60 calendar days or less. Prior to November 10, 2006 a redemption fee was imposed on the redemption of shares (including by exchange) of the Goldman Sachs High Yield Fund held for 30 calendar days or less and no redemption fee was imposed on the High Yield Municipal Fund. Accordingly, the first sentence of the second full paragraph under Restrictions on Excessive Trading Practices Policies and Procedures on Excessive Trading Practices in the Shareholder Guide of the Prospectuses is hereby revised as follows: To deter excessive shareholder trading, the International Equity Funds and certain Fixed Income Funds (which are offered in separate prospectuses) impose a redemption fee on redemptions made within 30 calendar days of purchase (60 calendar days with respect to Goldman Sachs High Yield Fund and High Yield Municipal Fund) subject to certain exceptions. REDFEESTCK 9-06 537933
Prospectus Institutional Shares April 28, 2006 GOLDMAN SACHS SPECIALTY FUNDS Goldman Sachs U.S. Equity Dividend and Premium Fund Goldman Sachs Tollkeeper Fund SM Goldman Sachs Structured Tax-Managed Equity Fund Goldman Sachs Real Estate Securities Fund THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN A FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT RISKS, AND YOU MAY LOSE MONEY IN A FUND.
NOT FDIC-INSURED May Lose Value No Bank Guarantee
General Investment Management Approach Goldman Sachs Asset Management, L.P. ( GSAM@ ) serves as investment adviser to the U.S. Equity Dividend and Premium Fund, Tollkeeper, Structured Tax- Managed Equity (formerly, CORE SM Tax-Managed Equity) and Real Estate Securities Funds. GSAM is referred to in this Prospectus as the Investment Adviser. U.S. EQUITY DIVIDEND AND PREMIUM FUND I. Stock Selection and Portfolio Construction The U.S. Equity Dividend and Premium Fund seeks to maintain an equity portfolio that will produce a gross return similar to that of its equity benchmark, the S&P 500 Index. In addition, the Fund will write index call options against a portion of the equity portfolio. Because of the impact of call options written by the Fund, the return of the Fund is not expected to closely track the S&P 500 Index, even if the return of the portfolio securities held by the Fund resembles the return of the equity benchmark. In addition, the return of the Fund may trail the return of the S&P 500 Index for short or extended periods of time. Generally, the Fund will seek to hold certain of the higher dividend paying stocks within each industry and sector while still maintaining industry and sector weights that are similar to those of the S&P 500 Index. The Investment Adviser will consider annualized dividend yields, scheduled dividend record dates and any extraordinary dividends when evaluating securities. The Investment Adviser will generally not seek to outperform the S&P 500 Index through active security selection. The Investment Adviser will use proprietary quantitative techniques, including optimization tools, a risk model, and a transactions cost model, in identifying a portfolio of stocks that it believes may enhance expected dividend yield while limiting deviations when compared to the S&P 500 Index. Deviations are constrained with regard to position sizes, industry weights, sector weights, volatility as compared to the market (i.e., Beta) and estimated tracking error. II. Call Writing The Fund will regularly write call options in order to generate additional cash flow. It is anticipated that the calls will typically be written against the S&P 500 Index or against exchange-traded funds linked to the S&P 500 ( ETFs ). The goal of the call writing is to generate an amount of premium that, when annualized and added to the Fund s expected dividend yield, provides an attractive level of cash flow. Call writing, however, entails certain risks. For more information, see Principal 1
Risks of the Fund and Appendix A Other Portfolio Risks Risks of Writing S&P 500 Index and Related ETF Call Options. The Investment Adviser anticipates generally using index call options, or call option on related ETFs, with expirations of three months or less. Outstanding call options will be rolled forward upon expiration, so that there will generally be some options outstanding. Goldman Sachs U.S. Equity Dividend and Premium Fund is a fully invested portfolio that offers broad access to a well-defined stock universe, and disciplined stock selection along with exposure to the returns of S&P 500 Index or related ETF option call writing. TOLLKEEPER FUND THIS FUND INVESTS IN TOLLKEEPER COMPANIES (AS DESCRIBED ON PAGES 9 AND 10), AND ITS NET ASSET VALUE (NAV) MAY FLUCTUATE SUBSTANTIALLY OVER TIME. BECAUSE THE FUND CONCENTRATES ITS INVEST- MENTS IN TOLLKEEPER COMPANIES, THE FUND S PERFORMANCE MAY BE SUBSTANTIALLY DIFFERENT FROM THE RETURNS OF THE BROADER STOCK MARKET. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS AND, DEPENDING ON THE TIMING OF YOUR INVESTMENT, YOU MAY LOSE MONEY EVEN IF THE FUND S PAST RETURNS HAVE OUTPERFORMED THE FUND S BENCHMARK DURING SPECIFIED PERIODS OF TIME. THE FUND S PARTICIPATION IN THE INITIAL PUBLIC OFFERING (IPO) MARKET DURING ITS INITIAL START-UP PHASE MAY HAVE HAD A MAGNIFIED IMPACT ON THE FUND S PERFORMANCE BECAUSE OF ITS RELATIVELY SMALL ASSET BASE AT THAT TIME. IT IS PROBABLE THAT THE EFFECT OF IPO INVESTMENTS ON THE FUND S FUTURE PERFORMANCE WILL NOT BE AS SIGNIFICANT. 2
GENERAL INVESTMENT MANAGEMENT APPROACH Goldman Sachs Growth Investment Philosophy: 1. Invest as if buying the company/business, not simply trading its stock: Understand the business, management, products and competition. Perform intensive, hands-on fundamental research. Seek businesses with strategic competitive advantages. Over the long-term, expect each company s stock price ultimately to track the growth in the value of the business. 2. Buy high-quality growth businesses that possess strong business franchises, favorable long-term prospects and excellent management. 3. Purchase superior long-term growth companies at a favorable price seek to purchase at a fair valuation, giving the investor the potential to fully capture returns from above-average growth rates. Growth companies have earnings expectations that exceed those of the stock market as a whole. 3
STRUCTURED TAX-MANAGED EQUITY FUND Goldman Sachs Structured Tax-Managed Investment Philosophy: This Fund uses Goldman Sachs quantitative style of funds management which emphasizes the three building blocks of active management: stock selection, portfolio construction and efficient implementation. Step 1: Stock Selection We attempt to forecast expected returns on approximately 8,500 stocks on a daily basis using proprietary CORE SM ( Computer-Optimized, Research-Enhanced ) models developed by the Quantitative Equity ( QE ) team. These quantitative models are based on six investment themes Valuation, Momentum, Analyst Sentiment, Profitability, Earnings Quality, and Management Impact. The Valuation theme attempts to capture potential mispricings of securities, by comparing a measure of the company s intrinsic value to its market value. The Momentum theme attempts to measure the company s past market performance and expected future financial performance. The Analyst Sentiment theme looks at how Wall Street analysts views about a company s earnings and prospects are changing over time. The Profitability theme assesses whether the company has good profit margins and operating efficiency, while the Earnings Quality theme evaluates what percentage of the company s earnings are coming from more persistent, cash-based sources, as opposed to accruals. Finally, the Management Impact theme assesses the company management s financing/investing strategy and behavior. Step 2: Portfolio Construction A proprietary risk model, which attempts to identify and measure the comparative risks between equity investments as accurately as possible, includes all the above factors used in the return model, as well as several other factors associated with risk but not return. In this process, the Investment Adviser seeks to manage risk by overweighting stocks with positive characteristics identified in the risk model and underweighting stocks with negative characteristics relative to their benchmark weights, while maintaining other characteristics such as size and sector weights close to the benchmark. All investment decisions consider expected after-tax returns including realizing capital losses to offset realized gains, creating loss carry-forwards, and identifying securities for in-kind distribution. A computer optimizer evaluates many different security combinations (considering many possible weightings) in an effort to construct the most efficient risk/return portfolio given the Fund s benchmark. 4
GENERAL INVESTMENT MANAGEMENT APPROACH Step 3: Efficient Implementation The portfolio management team considers transaction costs at each step of the investment process. The team incorporates expected portfolio turnover when assigning weights to the variables of the Multifactor Model. The team also factors expected execution costs into portfolio construction and evaluates multiple trading options. The team then selects the trading strategy it believes will minimize the total transaction costs to the Fund. Goldman Sachs Structured Tax-Managed Equity Fund is a fully invested portfolio that offers broad access to a well-defined stock universe, seeks to outperform its benchmark on an after-tax basis through consistent, disciplined stock selection, and is intended to be an effective tool for implementing a tax-managed strategy within an overall investment portfolio. References in this Prospectus to a Fund s benchmark or benchmarks are for informational purposes only, and unless otherwise noted are not an indication of how a particular Fund is managed. REAL ESTATE SECURITIES FUND Goldman Sachs Real Estate Securities Investment Philosophy: When choosing portfolio securities for the Real Estate Securities Fund, the Investment Adviser: Selects stocks based on quality and location of assets, experienced management and a sustainable competitive advantage. Seeks to buy securities at a discount to the intrinsic value of the business (assets and management). Seeks a team approach to decision making. Over time, REITs (which stands for Real Estate Investment Trusts) have offered investors important diversification and competitive total returns versus the broad equity and fixed income markets. 5
Fund Investment Objectives and Strategies Goldman Sachs U.S. Equity Dividend and Premium Fund FUND FACTS Objective: Benchmarks: Investment Focus: Investment Style: Symbol: Income and Total Return S&P 500 Index and Lehman Brothers Aggregate Bond Index Large-cap U.S. equity investments with a focus on dividend paying stocks along with an exposure to S&P 500 Index or related ETF option call writing Quantitative GSPKX INVESTMENT OBJECTIVE The Fund seeks to maximize income and total return. The Fund seeks this objective primarily through investment in large-cap U.S. equity securities and S&P 500 Index or related ETF option call writing. PRINCIPAL INVESTMENT STRATEGIES Equity Investments. Under normal circumstances, with respect to at least 80% of the Fund s net assets plus any borrowings for investment purposes (measured at time of purchase) ( Net Assets ), the Fund will invest in divided-paying equity investments in large-cap U.S. issuers (including foreign issuers that are traded in the United States) with public stock market capitalizations (based upon shares 6
FUND INVESTMENT OBJECTIVES AND STRATEGIES available for trading on an unrestricted basis) within the range of the market capitalization of the S&P 500 at the time of investment.* The Fund uses a variety of quantitative techniques when selecting investments. The Fund will seek to maintain risk, style, capitalization and industry characteristics similar to the S&P 500 Index. The Fund invests primarily in a diversified portfolio of common stocks of large-cap U.S. issuers represented in the S&P 500 Index and maintains industry weightings similar to those of the Index. The Fund seeks to generate additional cash flow by the sale of call options on the S&P 500 Index or related ETFs. The volatility of the Fund s portfolio is expected to be reduced by the Fund s sale of call options. The Fund anticipates that its cash flow will be derived from dividends on the common stock in its portfolio and premiums it receives from selling S&P 500 Index or related ETF call options. Cash flow from dividends will generally be considered income and will be included in quarterly distributions of income. Cash flow from options premiums is considered to be capital and will be included in the Fund s annual distribution of net capital gains. In addition, the Fund s returns will be affected by the capital appreciation and depreciation of the securities held in its portfolio. The Fund expects that, under normal circumstances, it will sell call options on the S&P 500 Index or related ETFs in an amount that is between 25% and 75% of the value of the Fund s portfolio. As the seller of the S&P 500 Index or related ETF call options, the Fund will receive cash (the premium ) from the purchaser. Depending upon the type of call option, the purchaser of an index or related ETF call option either (i) has the right to any appreciation in the value of the index or related ETF over a fixed price (the exercise price ) on a certain date in the future (the expiration date ) or (ii) has the right to any appreciation in the value of the index or related ETF over the exercise price at any time prior to the expiration of the option. If the purchaser does not exercise the option, the Fund retains the premium. If the purchaser exercises the option, the Fund pays the purchaser the difference between the price of the index or related ETF and the exercise price of the option. The premium, the exercise price and the market price of the index or related ETF determine the gain or loss realized by the Fund as the seller of the index *To the extent required by Securities and Exchange Commission ( SEC ) regulations, shareholders will be provided with sixty days notice in the manner prescribed by the SEC before any change in a Fund s policy to invest at least 80% of its Net Assets in the particular type of investment suggested by its name. 7
Goldman Sachs U.S. Equity Dividend and Premium Fund continued or related ETF call option. The Fund can also repurchase the call option prior to the expiration date, ending its obligation. In this case, the cost of entering into closing purchase transactions will determine the gain or loss realized by the Fund. During periods in which the U.S. equity markets are generally unchanged or falling, a diversified portfolio with a S&P 500 Index and related ETF call option strategy may outperform the same portfolio without the options because of the premiums received from writing call options. Similarly, in a modestly rising market (where the income from premiums exceeds the aggregate appreciation of the underlying index or related ETF over their exercise prices) such a portfolio may outperform the same portfolio without the options. However, in other rising markets (where the aggregate appreciation of the underlying index or related ETF over its exercise price exceeds the income from premiums), a portfolio with a S&P 500 Index and related ETF call strategy could significantly underperform the same portfolio without the options. Tax-Efficient Investing. The Fund seeks to achieve returns primarily in the form of qualifying dividends paid on common stocks, capital gains from the options and portfolio securities the Fund sells, and unrealized price appreciation, and may use different strategies in seeking tax-efficiency. These strategies include: Limiting portfolio turnover that may result in short-term capital gains Selling tax lots of securities that have a higher tax basis before selling tax lots of securities that have a lower tax basis The Fund s practice of writing call options, however, will generally result in shortterm and long-term capital gains or losses each year under special tax rules applicable to those transactions. The Fund will seek to offset the short-term capital gains from option writing by generating offsetting short term capital losses in the portfolio. The tax goals of this Fund differ from those of the Structured Tax- Managed Equity Fund described elsewhere in this prospectus. The U.S. Equity Dividend and Premium Fund does not seek to defer the realization of long-term capital gains. It merely seeks to avoid or minimize any net short-term capital gains. See Taxation-Distributions below. Other. The Fund s investments in fixed-income securities are limited to securities that are considered cash equivalents. 8
FUND INVESTMENT OBJECTIVES AND STRATEGIES Goldman Sachs Tollkeeper Fund FUND FACTS Objective: Investment Focus: Investment Style: Symbol: Long-term growth of capital U.S. equity investments that offer long-term capital appreciation with a primary focus on technology, media and service companies Growth GITIX INVESTMENT OBJECTIVE The Fund seeks long-term growth of capital. PRINCIPAL INVESTMENT STRATEGIES Equity Investments. The Fund invests, under normal circumstances, at least 80% of its net assets plus any borrowings for investment purposes (measured at time of purchase) ( Net Assets ) in equity investments in Tollkeeper companies (as described below). The Fund seeks to achieve its investment objective by investing in equity investments of companies that the Investment Adviser believes are well positioned to benefit from the proliferation of technology. Although the Fund invests primarily in publicly traded U.S. securities, it may invest up to 25% of its total assets in foreign securities, including securities of issuers in emerging markets or countries ( emerging countries ) and securities quoted in foreign currencies. The Fund intends to invest a substantial portion of its assets in companies the Investment Adviser describes as Tollkeepers. In general, the Investment Adviser defines a Tollkeeper company as a high-quality technology, media or service company that adopts or uses technology to improve its cost structure, revenue 9
Goldman Sachs Tollkeeper Fund continued opportunities or competitive advantage. The Investment Adviser seeks to identify Tollkeeper companies that exhibit many of the following characteristics: Strong brand name Dominant market share Recurring revenue streams Free cash flow generation Long product life cycle Enduring competitive advantage Excellent management To the Investment Adviser, Tollkeeper connotes a promising growth business. Like a toll collector for a highway or bridge, Tollkeeper companies may grow revenue by increasing traffic, or customers and sales, and raising tolls, or prices, and margins. The Investment Adviser believes that the characteristics of many Tollkeeper companies, including dominant market share, strong brand name and recurring revenue or the ability to generate free cash flow, should enable them to consistently grow their business. The Investment Adviser does not define companies that are capital intensive, low margin businesses as Tollkeepers (although the Investment Adviser may invest in such companies as part of the Fund s 20% basket of securities which are not or may not be Tollkeepers). The Internet is an example of a technology that the Investment Adviser believes will drive growth for many Tollkeeper businesses. The Internet has had, and is expected to continue to have, a significant impact on the global economy, as it changes the way many companies operate. Benefits of the Internet for businesses may include global scalability, acquisition of new clients, new revenue sources and increased efficiencies. Tollkeeper companies adopting Internet technologies to improve their business model include technology, media and service companies. Because of its focus on technology, media and service companies, the Fund s investment performance will be closely tied to many factors which affect technology, media and service companies. These factors include intense competition, consumer preferences, problems with product compatibility and government regulation. Tollkeeper securities may experience significant price movements caused by disproportionate investor optimism or pessimism with little or no basis in fundamental economic conditions. The Fund may also invest in a relatively few number of issuers. As a result, the Fund s NAV is more likely to have greater fluctuations than that of a fund which is more diversified or invests in other industries. 10
FUND INVESTMENT OBJECTIVES AND STRATEGIES Goldman Sachs Structured Tax-Managed Equity Fund FUND FACTS Objective: Benchmark: Investment Focus: Investment Style: Symbol: Long-term after-tax growth of capital Russell 3000 Index A total market, broadly diversified portfolio of U.S. equity investments Tax-managed quantitative focus GCTIX INVESTMENT OBJECTIVE The Fund seeks to provide long-term after-tax growth of capital through taxsensitive participation in a broadly diversified portfolio of U.S. equity securities. PRINCIPAL INVESTMENT STRATEGIES Equity Investments. The Fund invests, under normal circumstances, at least 80% of its net assets plus any borrowings for investment purposes (measured at time of purchase) ( Net Assets ) in equity investments in U.S. issuers, including foreign issuers that are traded in the United States.* The Fund uses both a variety of quantitative techniques and fundamental research when selecting investments which have the potential to maximize the Fund s aftertax return, and minimize capital gains and income distributions. The Fund will seek to maintain risk, style, capitalization and industry characteristics similar to the Russell 3000 Index. Tax-Managed Investing. In managing the Fund, the Investment Adviser balances investment considerations and tax considerations. The Fund seeks to achieve returns *To the extent required by SEC regulations, shareholders will be provided with sixty days notice in the manner prescribed by the SEC before any change in a Fund s policy to invest at least 80% of its Net Assets in the particular type of investment suggested by its name. 11
Goldman Sachs Structured Tax-Managed Equity Fund continued primarily in the form of price appreciation (which is not subject to current tax), and may use different strategies in seeking tax-efficiency. These strategies include: Offsetting long-term and short-term capital gains with long-term and short-term capital losses and creating loss carry-forward positions Limiting portfolio turnover that may result in taxable gains Selling tax lots of securities that have a higher tax basis before selling tax lots of securities that have a lower tax basis In situations where the Fund would otherwise be required to sell portfolio securities to meet shareholder redemption requests (and possibly realizing taxable gains), the Fund may borrow money to make the necessary redemption payments. In addition, Goldman Sachs may, but would not in any instance be required to, make contemporaneous purchases of Fund shares for its own account that would provide the Fund with cash to meet its redemption payment obligations. When the Fund borrows money, the Investment Adviser intends to hedge the excess market exposure created by borrowing. There is no guarantee such hedging will be completely effective. The Fund may not achieve its investment objective of providing after-tax growth of capital for various reasons. Implementation of tax-managed investment strategies may not materially reduce the amount of taxable income and capital gains distributed by the Fund to shareholders. Other. The Fund s investments in fixed-income securities are limited to securities that are considered cash equivalents. The Fund is not a suitable investment for IRAs, other tax-exempt or tax-deferred accounts or for other investors who are not sensitive to the federal income tax consequences of their investments. 12
FUND INVESTMENT OBJECTIVES AND STRATEGIES Goldman Sachs Real Estate Securities Fund FUND FACTS Objective: Benchmark: Investment Focus: Investment Style: Symbol: Total return comprised of long-term growth of capital and dividend income Wilshire Real Estate Securities Index REITs and real estate operating companies Growth at a discount GREIX INVESTMENT OBJECTIVE The Fund seeks total return comprised of long-term growth of capital and dividend income. PRINCIPAL INVESTMENT STRATEGIES Equity Investments. The Fund invests, under normal circumstances, substantially all and at least 80% of its net assets plus any borrowings for investment purposes (measured at time of purchase) ( Net Assets ) in a diversified portfolio of equity investments in issuers that are primarily engaged in or related to the real estate industry.* The Fund expects that a substantial portion of its assets will be invested in REITs and real estate industry companies. A real estate industry company is a company that derives at least 50% of its gross revenues or net profits from the ownership, development, construction, financing, management or sale of commercial, industrial or residential real estate or interests therein. The Fund s investment strategy is based on the premise that property market fundamentals are the primary determinant of growth, underlying the success of companies in the real estate industry. The Investment Adviser focuses on *To the extent required by SEC regulations, shareholders will be provided with sixty days notice in the manner prescribed by the SEC before any change in a Fund s policy to invest at least 80% of its Net Assets in the particular type of investment suggested by its name. 13
Goldman Sachs Real Estate Securities Fund continued companies that can achieve sustainable growth in cash flow and dividend paying capability. The Investment Adviser attempts to purchase securities so that its underlying portfolio will be diversified geographically and by property type. Although the Fund will invest primarily in publicly traded U.S. securities, it may invest up to 15% of its total assets in foreign securities, including securities of issuers in emerging countries and securities quoted in foreign currencies. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs. Mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skill, may not be diversified, and are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax free passthrough of income and failing to maintain their exemptions from investment company registration. REITs whose underlying properties are concentrated in a particular industry or geographic region are also subject to risks affecting such industries and regions. REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT s investment in fixed rate obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT s investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. The REIT investments of the Real Estate Securities Fund often do not provide complete tax information to the Fund until after the calendar year-end. Consequently, because of the delay, it may be necessary for the Fund to request permission to extend the deadline for issuance of Forms 1099-DIV beyond January 31. Other. The Fund may invest up to 20% of its total assets in fixed-income investments, such as government, corporate debt and bank obligations, that offer the potential to further the Fund s investment objective. 14
Other Investment Practices and Securities The table below identifies some of the investment techniques that may (but are not required to) be used by the Funds in seeking to achieve their investment objectives. The table also highlights the differences between the Funds in their use of these techniques and other investment practices and investment securities. Numbers in this table show allowable usage only; for actual usage, consult the Funds annual and semi-annual reports. For more information about these and other investment practices and securities, see Appendix A. Each Fund publishes on its website (http://www.gs.com/funds) complete portfolio holdings for the Fund as of the end of each calendar quarter subject to a fifteen calendar-day lag between the date of the information and the date on which the information is disclosed. In addition, the Funds publish on their website month-end top ten holdings subject to a ten calendar-day lag between the date of the information and the date on which the information is disclosed. This information will be available on the website until the date on which a Fund files its next quarterly portfolio holdings report on Form N-CSR or Form N-Q with the SEC. In addition, a description of the Fund s policies and procedures with respect to the disclosure of a Fund s portfolio securities is available in the Fund s Statement of Additional Information ( Additional Statement ). 10 Percent of total assets (including securities lending collateral) (italic type) 10 Percent of net assets (excluding borrowings for investment purposes) (roman type) ) No specific percentage limitation on usage; limited only by the objectives and strategies Structured U.S. Equity Tax-Managed Real Estate of the Fund Dividend and Tollkeeper Equity Securities Not permitted Premium Fund Fund Fund Fund Investment Practices Borrowings 33 1 /3 33 1 /3 33 1 /3 33 1 /3 Credit, Currency, Index, Interest Rate, Total Return and Mortgage Swaps and Options on Swaps* 15 Cross Hedging of Currencies ) ) Custodial Receipts and Trust Certificates ) ) ) ) Equity Swaps* 15 15 15 15 Foreign Currency Transactions** ) ) Futures Contracts and Options on Futures Contracts ) ) ) 3 ) Interest Rate Caps, Floors and Collars ) ) Investment Company Securities (including exchange-traded funds) 10 10 10 10 Mortgage Dollar Rolls ) Options on Foreign Currencies 1 ) ) Options on Securities and Securities Indices 2 ) ) ) ) Repurchase Agreements ) ) ) ) Securities Lending 33 1 /3 33 1 /3 33 1 /3 33 1 /3 Short Sales Against the Box 25 25 Unseasoned Companies ) ) ) ) Warrants and Stock Purchase Rights ) ) ) ) When-Issued Securities and Forward Commitments ) ) ) ) * Limited to 15% of net assets (together with other illiquid securities) for all structured securities which are not deemed to be liquid and all swap transactions. ** Limited by the amount each Fund may invest in foreign securities. 1 The Tollkeeper and Real Estate Securities Funds may purchase and sell call and put options. 2 The Funds may sell covered call and put options and purchase call and put options. 3 The U.S. Equity Dividend and Premium Fund and Structured Tax-Managed Equity Fund may enter into futures transactions only with respect to U.S. equity indices. 15
10 Percent of total assets (excluding securities lending collateral) (italic type) 10 Percent of Net Assets (including borrowings for investment purposes) (roman type) ) No specific percentage limitation on usage; limited only by the objectives and strategies Structured U.S. Equity Tax-Managed Real Estate of the Fund Dividend and Tollkeeper Equity Securities Not permitted Premium Fund Fund Fund Fund Investment Securities American, European and Global Depositary Receipts ) 4 ) ) 4 ) Asset-Backed and Mortgage-Backed Securities 5 ) ) Bank Obligations 5 ) ) ) ) Convertible Securities 6 ) ) ) ) Corporate Debt Obligations 5 ) ) ) ) Equity Investments 80+ 80+ 80+ 80+ Emerging Country Securities 7 25 15 Fixed Income Securities 20 8 20 20 8 20 Foreign Securities 7 ) 9 25 ) 9 15 Non-Investment Grade Fixed Income Securities 20 10 20 10 Real Estate Investment Trusts ) ) ) ) Stripped Mortgage-Backed Securities 5 ) Structured Securities* 5 ) ) ) ) Temporary Investments 35 ) 35 ) U.S. Government Securities 5 ) ) ) ) Yield Curve Options and Inverse Floating Rate Securities ) * Limited to 15% of net assets (together with other illiquid securities) for all structured securities which are not deemed to be liquid and all swap transactions. 4 The U.S. Equity Dividend and Premium Fund and Structured Tax-Managed Equity Fund do not invest in European Depositary Receipts. 5 Limited by the amount the Fund invests in fixed-income securities. 6 Convertible securities purchased by the Funds use the same rating criteria for convertible and nonconvertible debt securities. 7 The Tollkeeper and Real Estate Securities Funds may invest in the aggregate up to 25% and 15%, respectively, of their total assets in foreign securities, including emerging country securities. 8 Cash equivalents only. 9 Equity securities of foreign issuers must be traded in the United States. 10 May be BB or lower by Standard & Poor s Rating Group ( Standard & Poor s ) or Ba or lower by Moody s Investors Service, Inc. ( Moody s ) or have a comparable rating by another nationallyrecognized statistical rating organization at the time of investment. 16
Principal Risks of the Funds Loss of money is a risk of investing in each Fund. An investment in a Fund is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. The following summarizes important risks that apply to the Funds and may result in a loss of your investment. None of the Funds should be relied upon as a complete investment program. There can be no assurance that a Fund will achieve its investment objective. ) Applicable Not applicable Structured U.S. Equity Tax-Managed Real Estate Dividend and Tollkeeper Equity Securities Premium Fund Fund Fund Fund Credit/Default Foreign ) ) Emerging Countries ) Industry Concentration ) ) Stock ) ) ) ) Derivatives ) ) Interest Rate ) IPO ) ) Management ) ) ) ) Market ) ) ) ) Liquidity ) ) ) ) REIT ) Investment Style ) ) ) ) Mid Cap and Small Cap ) ) ) Internet ) Tax-Managed Investment Risk ) ) Option Writing ) General Risks: Credit/Default Risk The risk that an issuer or guarantor of fixed-income securities held by a Fund may default on its obligation to pay interest and repay principal. Foreign Risk The risk that when a Fund invests in foreign securities, it will be subject to risk of loss not typically associated with domestic issuers. Loss may result because of less foreign government regulation, less public information and less economic, political and social stability. Loss may also result from the imposition of exchange controls, confiscations and other government restrictions. A Fund will also be subject to the risk of negative foreign currency rate fluctuations. 17
Foreign risks will normally be greatest when a Fund invests in issuers located in emerging countries. Emerging Countries Risk The securities markets of Asian, Latin, Central and South American, Eastern European, Middle Eastern, African and other emerging countries are less liquid, are especially subject to greater price volatility, have smaller market capitalizations, have less government regulation and are not subject to as extensive and frequent accounting, financial and other reporting requirements as the securities markets of more developed countries. Further, investment in equity securities of issuers located in certain emerging countries involves risk of loss resulting from problems in share registration and custody and substantial economic and political disruptions. These risks are not normally associated with investments in more developed countries. Industry Concentration Risk The risk that a Fund concentrates its investments in specific industry sectors that have historically experienced substantial price volatility. A Fund is subject to greater risk of loss as a result of adverse economic, business or other developments than if its investments were diversified across different industry sectors. Securities of issuers held by a Fund may lack sufficient market liquidity to enable a Fund to sell the securities at an advantageous time or without a substantial drop in price. Stock Risk The risk that stock prices have historically risen and fallen in periodic cycles. Recently, U.S. and foreign stock markets have experienced substantial price volatility. Derivatives Risk The risk that loss may result from a Fund s investments in options, futures, swaps, structured securities and other derivative instruments. These instruments may be illiquid, difficult to price and leveraged so that small changes may produce disproportionate losses to a Fund. Interest Rate Risk The risk that when interest rates increase, fixed-income securities held by a Fund will decline in value. Long-term fixed-income securities will normally have more price volatility because of this risk than short-term fixedincome securities. IPO Risk The risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk. When a Fund s asset base is small, a significant portion of the Fund s performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Fund s assets grow, the effect of the Fund s investments in IPOs on the Fund s performance probably will decline, which could reduce the Fund s performance. Management Risk The risk that a strategy used by the Investment Adviser may fail to produce the intended results. 18
PRINCIPAL RISKS OF THE FUNDS Market Risk The risk that the value of the securities in which a Fund invests may go up or down in response to the prospects of individual companies, particular industry sectors or governments and/or general economic conditions. Price changes may be temporary or last for extended periods. Liquidity Risk The risk that a Fund will not be able to pay redemption proceeds within the time period stated in this Prospectus because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. Funds that invest in non-investment grade fixed-income securities, small and midcapitalization stocks, REITs or emerging country issuers will be especially subject to the risk that during certain periods the liquidity of particular issuers or industries, or all securities within particular investment categories, will shrink or disappear suddenly and without warning as a result of adverse economic, market or political events, or adverse investor perceptions whether or not accurate. The Goldman Sachs Asset Allocation Portfolios (the Asset Allocation Portfolios ) expect to invest a significant percentage of their assets in certain of the Funds and other funds for which GSAM or an affiliate now or in the future acts as investment adviser or underwriter. Redemptions by an Asset Allocation Portfolio of its position in a Fund may further increase liquidity risk and may impact a Fund s net asset value ( NAV ). REIT Risk Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITs whose underlying properties are concentrated in a particular industry or geographic region are also subject to risks affecting such industries and regions. The securities of REITs involve greater risks than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements because of interest rate changes, economic conditions and other factors. Securities of such issuers may lack sufficient market liquidity to enable a Fund to effect sales at an advantageous time or without a substantial drop in price. Mid Cap and Small Cap Risk The securities of small capitalization and midcapitalization companies involve greater risks than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements. Securities of such issuers may lack sufficient market liquidity to enable a Fund to effect sales at an advantageous time or without a substantial drop in price. Both mid-cap and small-cap companies often have narrower markets and more limited managerial and financial resources than larger, more established companies. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund s portfolio. Generally, the smaller the company size, the greater these risks. Investment Style Risk Different investment styles tend to shift in and out of favor depending upon market and economic conditions as well as investor sentiment. A Fund may outperform or underperform other funds that employ a different 19
investment style. Examples of different investment styles include growth and value investing. Growth stocks may be more volatile than other stocks because they are more sensitive to investor perceptions of the issuing company s growth of earnings potential. Growth companies are often expected by investors to increase their earnings at a certain rate. When these expectations are not met, investors can punish the stocks inordinately even if earnings showed an absolute increase. Also, since growth companies usually invest a high portion of earnings in their business, growth stocks may lack the dividends of some value stocks that can cushion stock prices in a falling market. Growth oriented funds will typically underperform when value investing is in favor. Value stocks are those that are undervalued in comparison to their peers due to adverse business developments or other factors. Other Specific Risks: Internet Risk The risk that the stock prices of Internet and Internet-related companies and therefore the value of the Tollkeeper Fund will experience significant price movements as a result of intense market volatility, worldwide competition, consumer preferences, product compatibility, product obsolescence, government regulation, excessive investor optimism or pessimism, or other factors. The Tollkeeper Fund may also invest in a relatively few number of issuers. Thus, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio and may be more susceptible to greater losses because of these developments. Tax-Managed Investment Risk Because the Investment Adviser balances investment considerations and tax considerations, the pre-tax performance of the U.S. Equity Dividend and Premium Fund and Structured Tax-Managed Equity Fund may be lower than the performance of similar Funds that are not tax-managed. This is because the Investment Adviser may choose not to make certain investments that may result in taxable distributions. Even though tax-managed strategies are being used, they may not reduce the amount of taxable income and capital gains distributed by the U.S. Equity Dividend and Premium Fund and Structured Tax- Managed Equity Fund to shareholders. A high percentage of the Fund NAV may consist of unrealized capital gains, which represent a potential future tax liability to shareholders. The Structured Tax-Managed Equity Fund is not a suitable investment for IRAs, other tax-exempt or tax-deferred accounts or for other investors who are not sensitive to the federal income tax consequences of their investments. Option Writing Risk Writing (selling) call options limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option. When the U.S. Equity Dividend and Premium Fund writes (sells) S&P 500 Index or related ETF call options, it receives cash but limits its opportunity to profit from an increase in the market value of the S&P 500 Index or related ETF beyond the exercise price (plus the premium received) of the option. 20
PRINCIPAL RISKS OF THE FUNDS In a rising market, the U.S. Equity Dividend and Premium Fund could significantly underperform the market. The Fund s option strategies may not fully protect it against declines in the value of the market. Cash received from premiums will enhance return in declining markets, but the Fund will continue to bear the risk of a decline in the value of the securities held in its portfolio. The benefit from writing a call option is limited to the amount of premium received. In a period of a sharply falling equity market, the Fund will likely also experience sharp declines in its net asset value. More information about the Funds portfolio securities and investment techniques, and their associated risks, is provided in Appendix A. You should consider the investment risks discussed in this section and in Appendix A. Both are important to your investment choice. 21
Fund Performance HOW THE FUNDS HAVE PERFORMED The bar chart and table provide an indication of the risks of investing in a Fund by showing: (a) changes in the performance of a Fund s Institutional Shares from year to year; and (b) how the average annual total returns of a Fund s Institutional Shares compare to those of broad-based securities market indices. The bar chart (including Best Quarter and Worst Quarter information) and table assume reinvestment of dividends and distributions. A Fund s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Performance reflects expense limitations in effect. If expense limitations were not in place, a Fund s performance would have been reduced. The Goldman Sachs U.S. Equity Dividend and Premium Fund commenced operations on August 31, 2005. No performance information regarding the Goldman Sachs U.S. Equity Dividend and Premium Fund is included in this Section because such Fund has less than one calendar year of performance. INFORMATION ON AFTER-TAX RETURNS These definitions apply to the after-tax returns. Average Annual Total Returns Before Taxes. These returns do not reflect taxes on distributions on a Fund s Institutional Shares nor do they show how performance can be impacted by taxes when shares are redeemed (sold) by you. Average Annual Total Returns After Taxes on Distributions. These returns assume that taxes are paid on distributions on a Fund s Institutional Shares (i.e., dividends and capital gains) but do not reflect taxes that may be incurred upon redemption (sale) of the Institutional Shares at the end of the performance period. Average Annual Total Returns After Taxes on Distributions and Sale of Shares. These returns reflect taxes paid on distributions on a Fund s Institutional Shares and taxes applicable when the shares are redeemed (sold). Note on Tax Rates. The after-tax performance figures are calculated using the historically highest individual federal marginal income tax rates at the time of the distributions and do not reflect state and local taxes. In calculating the federal income taxes due on redemptions, capital gains taxes resulting from a redemption are subtracted from the redemption proceeds and the tax benefits from capital losses resulting from the redemption are added to the redemption proceeds. Under certain circumstances, the addition of the tax benefits from capital losses resulting from redemptions may cause the Returns After Taxes on Distributions and Sale of Fund Shares to be greater than the Returns After Taxes on Distributions or even the Returns Before Taxes. 22